A higher value of sterling makes US imports cheaper for British consumers, but, UK exports become more expensive.
An appreciation in the exchange rate will tend to reduce aggregate demand (assuming demand is relatively elastic) Because exports will fall and imports increase.
What happens when exchange rate increases?
A strong dollar or increase in the exchange rate (appreciation) is often better for individuals because it makes imports cheaper and lowers inflation. The weak dollar means foreign countries and individuals can now purchase more American currency with less of their currency.
How do exchange rates increase?
A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.
What factors affect exchange rates?
Factors which influence the exchange rate. Exchange rates are determined by factors, such as interest rates, confidence, the current account on balance of payments, economic growth and relative inflation rates.
What makes exchange rates go up and down?
Like all markets, currency is affected by both its supply and demand. The desirability, or demand for a given currency also results in changes to its value. There are many factors that affect demand for a currency, such as interest rates between countries, political factors, expectations and trade balance.